SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- - - - - - - - -
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarter ended June 30, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ---- to -----.
Commission File Number 1-10492
EPITOPE, INC.
(Exact name of registrant as specified in its charter)
OREGON NO. 93-0779127
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
8505 SW Creekside Place
Beaverton, Oregon 97008-7108
(Address of principal executive offices) (Zip code)
(503) 641-6115
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares of Common Stock, no par value, outstanding as of June
30, 1998: 13,557,406
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
PAGE NO.
--------
ITEM 1. CONDENSED FINANCIAL STATEMENTS
<S> <C>
Condensed Balance Sheets
at June 30, 1998 (unaudited) and September 30, 1997.................... 3
Condensed Statements of Operations
(unaudited) for the three and nine months ended June 30, 1998 and 1997 4
Condensed Statements of Changes in Shareholders' Equity
(unaudited) for the three and nine months ended June 30, 1998.......... 5
Condensed Statements of Cash Flows
(unaudited) for the nine months ended June 30, 1998 and 1997........... 6
Notes to Condensed Financial Statements (unaudited)........................ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................................. 9
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION....................................................... 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................... 11
</TABLE>
2
<PAGE>
EPITOPE, INC.
CONDENSED BALANCE SHEETS
<TABLE>
6/30/98 9/30/97
(Unaudited)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents.............................................. $ 597,901 $ 1,934,480
Marketable securities.................................................. 4,991,242 7,141,640
Trade accounts receivable, net ........................................ 1,242,902 928,047
Other receivables...................................................... 52,698 128,949
Inventories (Note 2) .................................................. 1,092,213 1,324,647
Prepaid expenses ...................................................... 506,845 78,240
------------ -------------
8,483,801 11,536,003
Property and equipment, net ........................................... 870,275 1,200,988
Patents and proprietary technology, net ............................... 608,586 657,487
Other assets and deposits.............................................. 51,539 55,099
Net assets of discontinued operations (Note 3)......................... - 3,562,726
------------ -------------
$ 10,014,201 $ 17,012,303
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ...................................................... $ 324,737 $ 110,285
Salaries, benefits and other accrued liabilities ...................... 1,606,373 1,887,825
------------ -------------
1,931,110 1,998,110
Commitments and contingencies ......................................... - -
Shareholders' equity (Note 4)
Contributed capital ................................................... 111,149,962 110,439,726
Accumulated deficit.................................................... (103,066,871) (95,425,533)
------------ -------------
8,083,091 15,014,193
$ 10,014,201 $ 17,012,303
============ =============
</TABLE>
3
<PAGE>
EPITOPE, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
6/30/98 6/30/97 6/30/98 6/30/97
<S> <C> <C> <C> <C>
Revenues
Product sales .............................. $ 2,781,944 $ 2,500,010 $ 6,476,291 $ 7,011,369
Grants and contracts ....................... 1,271 383,652 12,652 848,991
----------- ----------- ----------- ------------
2,783,215 2,883,662 6,488,943 7,860,360
Costs and expenses
Product costs .............................. 928,294 970,078 2,514,548 2,771,933
Research and development costs ............. 766,645 1,466,028 2,064,390 3,333,058
Selling, general and administrative expenses 1,414,007 1,568,459 4,104,197 4,724,804
----------- ----------- ----------- ------------
3,108,946 4,004,565 8,683,135 10,829,795
Loss from operations ....................... (325,731) (1,120,903) (2,194,192) (2,969,435)
Other income (expense), net
Interest income............................. 82,115 172,906 283,342 749,768
Interest expense............................ (215) - (7,631) -
Other, net.................................. (16,252) 312 (30,840) 16,800
----------- ----------- ----------- ------------
65,648 173,218 244,871 766,568
Net loss from continuing operations......... (260,083) (947,685) (1,949,321) (2,202,867)
Loss from discontinued operations (Note 3).. - (1,365,866) - (14,661,580)
----------- ----------- ----------- ------------
Net loss.................................... $ (260,083) $(2,313,551) $(1,949,321) $(16,864,447)
=========== =========== =========== ============
Basic and diluted loss per share
from continuing operations......... $ (0.02) $ (0.07) $ (0.14) $ (0.16)
Basic and diluted net loss per share........ $ (0.02) $ (0.17) $ (0.14) $ (1.26)
Weighted average number of shares outstanding 13,544,761 13,522,733 13,494,865 13,404,402
</TABLE>
4
<PAGE>
EPITOPE, INC.
CONDENSED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
COMMON STOCK ACCUMULATED
SHARES DOLLARS DEFICIT TOTAL
<S> <C> <C> <C> <C>
BALANCES AT SEPTEMBER 30, 1997................ 13,454,330 $ 110,439,726 $ (95,425,533) $ 15,014,193
Common stock issued as compensation........... 6,711 24,160 - 24,160
Compensation expense for stock
option grants............................. - 113,056 - 113,056
Spin-off of Agritope, Inc. ................... - - (5,692,017) (5,692,017)
Net loss for the period....................... - - (955,336) (955,336)
---------- ------------- ------------- ------------
BALANCES AT DECEMBER 31, 1997................. 13,461,041 110,576,942 (102,072,886) 8,504,056
Common stock issued upon exercise
of options................................ 75,619 313,721 - 313,721
Common stock issued as compensation........... 5,109 35,582 - 35,582
Compensation expense for stock
option grants............................. - 67,731 - 67,731
Net loss for the period....................... - - (733,902) (733,902)
---------- ------------- ------------- ------------
BALANCES AT MARCH 31, 1998.................... 13,541,769 $ 110,993,976 $(102,806,788) $ 8,187,188
Common stock issued upon exercise
of options................................ 12,437 58,074 - 58,074
Common stock issued as compensation........... 3,200 20,806 - 20,806
Compensation expense for stock
option grants............................. - 77,106 - 77,106
Net loss for the period....................... - - (260,083) (260,083)
---------- ------------- ------------- ------------
BALANCES AT JUNE 30, 1998..................... 13,557,406 $ 111,149,962 $(103,066,871) $ 8,083,091
========== ============= ============= ============
</TABLE>
5
<PAGE>
EPITOPE, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
NINE MONTHS ENDED JUNE 30 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss .............................................................. $ (1,949,321) $(16,864,467)
Adjustments to reconcile net loss
to net cash used in operating activities:
Loss from discontinued operations ..................................... - 14,463,796
Depreciation and amortization ......................................... 510,367 547,570
Loss on disposition of assets.......................................... 33,320
Increase in accounts receivable and other receivables ................. (238,605) (294,983)
Decrease (increase) in inventories .................................... 232,434 (194,790)
Increase in prepaid expenses .......................................... (428,604) (135,130)
(Decrease) increase in accounts payable and accrued liabilities ....... (67,000) 231,245
Common stock issued as compensation for services....................... 80,548 272,091
Compensation expense for stock option grants and
deferred salary increases .......................................... 257,893 319,862
Other, net ............................................................ (8,620) 13,704
------------ ------------
Net cash used in operating activities.................................. (1,577,588) (1,641,102)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in marketable securities ................................... (12,112,837) (17,083,654)
Proceeds from sale of marketable securities ........................... 14,265,656 26,977,551
Additions to property and equipment ................................... (87,678) (187,053)
Proceeds from sale of property and equipment........................... 37,629 -
Expenditures for patents and proprietary technology ................... (114,025) (214,184)
Investment in affiliated companies .................................... 9,760 (6,627,927)
------------ ------------
Net cash provided by (used in) investing activities.................... 1,998,505 2,864,733
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock ................................ 371,795 77,584
Advances in connection with spin-off .................................. (2,129,291) (5,188,267)
------------ ------------
Net cash used in financing activities.................................. (1,757,496) (5,110,683)
Net decrease in cash and cash equivalents ............................. (1,336,579) (3,887,052)
Cash and cash equivalents at beginning of period ...................... 1,934,480 5,699,263
------------ ------------
Cash and cash equivalents at end of period............................. $ 597,901 $ 1,812,211
============ ============
</TABLE>
6
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 THE COMPANY
Epitope, Inc. (the Company or Epitope) is an Oregon corporation, which develops
and markets medical diagnostic products. Epitope's principal products, including
the OraSure oral specimen collection device, focus on the use of oral fluid to
detect HIV infection and other conditions, and are marketed primarily in the
life insurance and public health sectors.
The interim condensed financial statements included herein are unaudited;
however, in the opinion of the Company, the interim data include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results of operations for the interim periods. These
condensed financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's 1997 Annual Report on
Form 10-K. Results of operations for the periods ended June 30, 1998 are not
necessarily indicative of the results of operations expected for the full fiscal
year.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated and the results of
the former Agritope, Inc. subsidiary (Agritope) have been reflected as
discontinued operations in the comparable 1997 fiscal periods.
<TABLE>
Inventories. Inventory components are summarized as follows: 6/30/98 9/30/97
(Unaudited)
<S> <C> <C>
Raw materials.......................................................... $ 470,937 $ 296,432
Work-in-process ....................................................... 315,562 343,585
Finished goods ........................................................ 291,259 670,175
Supplies .............................................................. 14,455 14,455
----------- -----------
$ 1,092,213 $ 1,324,647
</TABLE>
Net Loss Per Share. Net loss per share has been computed using the weighted
average number of shares of common stock outstanding during the period. Common
stock equivalents were excluded from the computation because their effect is
anti-dilutive.
New Accounting Pronouncements. On June 15, 1998 the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). FAS
133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999 (October 1, 1999 for the Company). Management of the Company
anticipates that, because the Company does not make use of derivative
instruments, the adoption of FAS 133 will not have any effect on the Company's
results of operations or its financial position.
NOTE 3 DISCONTINUED OPERATIONS
On December 30, 1997, the Company distributed all of its shares of Agritope
common stock to Epitope shareholders of record as of December 26, 1997. The
costs of the spin-off and Agritope's operating losses in fiscal 1998 were
accounted for in fiscal year 1997. The comparable periods in fiscal 1997
included the loss from discontinued operations of Agritope and Andrew and
Williamson Sales, Co. (A&W).
7
<PAGE>
Bank Line of Credit. In connection with the acquisition of A&W, the Company had
guaranteed a bank line of credit maintained by A&W. On June 16, 1998 Wells Fargo
Bank N.A. cancelled the guaranty and the Company has no further obligations for
the line of credit.
NOTE 4 SHAREHOLDERS' EQUITY
The costs of the spin-off and Agritope's operating losses in fiscal 1998 were
accounted for in fiscal 1997 as expenses of discontinued operations. The overall
reduction in retained earnings as a result of the spin-off was $5,692,017,
including spin-off related costs. No additional material charges are expected
related to the Agritope spin-off.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of operations and financial condition should be read in
conjunction with the Financial Statements and Notes thereto included in the
Company's 1997 Annual Report on Form 10-K and with the Financial Statements and
Notes thereto included in this Quarterly Report on Form 10-Q. Statements set
forth below about future events or performance constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. These factors with respect to the Company include
loss or impairment of sources of capital; ability of the Company to develop
diagnostic product distribution channels; development of competing diagnostic
products, including blood and urine-based products; market acceptance of oral
testing products; changes in federal or state law or regulations applicable to
diagnostic products or their manufacture and marketing; loss of key personnel;
and other factors as described in the Company's 1997 Annual Report on Form 10-K.
Although forward-looking statements help to provide complete information about
the Company, readers should keep in mind that forward-looking statements are
much less reliable than historical information.
RESULTS OF OPERATIONS
Revenues. Total revenues decreased by $100,000 or 3.5% in the current quarter as
compared with the third quarter of fiscal 1997, and by $1,371,000 or 17% in the
comparable nine-month period. Revenues by product line are shown below:
<TABLE>
THREE MONTHS ENDED JUNE 30 (IN THOUSANDS, EXCEPT %) 1998 1997
DOLLARS PERCENT DOLLARS PERCENT
Product sales
<S> <C> <C> <C> <C>
Oral collection device................................. $ 2,180 78% $ 2,055 71%
Western blot HIV confirmatory test..................... 602 22 445 16
------- ---- ------- ----
2,782 100 2,500 87
Grants and contracts...................................... 1 - 384 13
------- ---- ------- ----
$ 2,783 100% $ 2,884 100%
NINE MONTHS ENDED JUNE 30 (IN THOUSANDS, EXCEPT %) 1998 1997
DOLLARS PERCENT DOLLARS PERCENT
Product sales
Oral collection device................................. $ 4,934 76% $ 5,631 72%
Western blot HIV confirmatory test..................... 1,542 24 1,380 17
------- ---- ------- ----
6,476 100 7,011 89
Grants and contracts...................................... 13 - 849 11
------- ---- ------- ----
$ 6,489 100% $ 7,860 100%
</TABLE>
Sales of the Company's OraSure oral specimen collection device increased by
$125,000 or 6% in the current quarter as compared to the third quarter in fiscal
1997, however sales in the comparable nine-month period in 1998 were $697,000 or
12% less than in 1997. As previously disclosed, the year to date shortfall is
attributable to the inventory build-up in the first three quarters of fiscal
1997 by major insurance testing laboratories that effected sales in the first
three quarters of 1998. The Company's continued expansion into the public health
markets in 1998 contributed to the increase in sales in the third quarter. The
Company's sales for OraSure products, including cotinine test devices, continued
to expand in foreign markets during the third quarter. As a part of this
expansion in international markets, OraSure is now being used for Hepatitis
testing in Argentina. Overall sales are anticipated to continue rising in the
fourth quarter. Expectations for future sales are based primarily on forecasts
provided to the Company by individual customers rather than firm orders, as many
of the customers in the public health market do not have contractual
arrangements with the Company.
9
<PAGE>
Sales of the Company's Western blot HIV confirmatory test increased by $157,000
or 35% in the current quarter as compared to the third quarter of fiscal 1997,
and by $162,000 or 12% in the comparable nine-month period, primarily due to
increased sales of OraSure devices in the public health sector resulting in
increased usage of this confirmatory test for HIV.
Grant and contract revenues decreased by $382,000 or nearly 100% in the current
quarter as compared to the third quarter of fiscal 1997, and by $836,000 or 98%
in the comparable nine-month period, primarily due the termination of the
Company's Development, License and Supply Agreement with its former strategic
partner, SmithKline Beecham plc (SB). Selected research projects are continuing,
directed at developing new applications for the OraSure oral collection device
with a focus on tests needed to expand the use of the OraSure device with
existing customers in life insurance and public health markets, and to move into
the market for drugs-of-abuse testing as previously disclosed.
Gross margins on product sales were 67% and 61% of sales in the third quarter
and first nine months of fiscal 1998 as compared to 61% and 60% of sales in the
comparable periods of fiscal 1997. The increase in gross margin for the third
quarter was due to improved volume variances as production was increased to meet
product demand. The Company expects to maintain comparable margins in the fourth
quarter of fiscal 1998.
Research and development costs decreased by $699,000 or 48% in the current
quarter as compared to the third quarter of fiscal 1997, and by $1,269,000 or
38% in the comparable nine-month period. This decrease was the result of
continued cost containment measures and a narrowing of the focus of research and
development projects to those judged to be commercially viable in the shortest
timeframe. Expenditures for these projects may vary significantly from quarter
to quarter as new projects are started while other projects may be extended or
completed. Research and development expenditures, including anticipated clinical
trial expenses, are expected to continue to increase in the next fiscal year.
These expenditures will support the expansion of oral fluid testing for
additional diseases, drugs-of-abuse and the start up of the previously announced
new OraQuick device. OraQuick is a rapid-assay, using oral fluid, to detect
various conditions by taking a sample and providing a test result in about a
ten-minute timeframe.
Selling, general and administrative expenses decreased $154,000 or 10% in the
current quarter as compared to the third quarter of fiscal 1997, and by $621,000
or 13% in the comparable nine-month period, primarily as a result of cost
containment measures and a reduction in compensation expense.
Year 2000 Compliance. As previously disclosed, the Company has determined that
the costs of addressing the Year 2000 issue are not material to the operations
or financial condition of the Company.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
(IN THOUSANDS) 6/30/98 9/30/97
<S> <C> <C>
Cash and cash equivalents.............................................. $ 598 $ 1,934
Marketable securities.................................................. 4,991 7,142
Working capital........................................................ 6,553 9,539
</TABLE>
During the current quarter, proceeds from the sale of marketable securities
represented the primary source of funds for meeting the Company's requirements
for operations and business expansion. Trade accounts receivable increased
during the quarter by $417,000 or 50% due to increased sales. Other receivables
decreased during the quarter by $77,000 or 59% primarily due to collections on
accounts. Cash usage has moderated due to increased sales, collection of trade
receivables and reduced spending. In fiscal 1998, cash and cash equivalents plus
marketable securities declined $424,000 or 7% in the third quarter as compared
to $2,974,000 or 33% in the first quarter and $89,000 or 2% in the second
quarter. The Company believes that its operating liquidity requirements for the
foreseeable future can be met by existing resources, including marketable
securities and cash generated by operations.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
PRODUCT CLEARANCES
During the quarter, the Company announced regulatory clearance from the FDA for
use of its OraSure oral specimen collection device with enzyme immunoassays
manufactured by STC Technologies, Inc. to test for opiates and opiate
metabolites. Management anticipates approval for use of the OraSure device to
test for phencyclidine (PCP) in the months ahead. The Company holds exclusive
distribution rights to the STC OraSure drugs-of-abuse assays outside the United
States.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits are listed on the attached exhibit index following the signature page
of this report.
(b) Reports on Form 8-K
None.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPITOPE, INC., an Oregon corporation
August 6, 1998 CHARLES E. BERGERON
Date Charles E. Bergeron
Chief Financial Officer
(Principal Financial Officer)
August 6, 1998 THEODORE R. GWIN
Date Theodore R. Gwin
Controller
(Principal Accounting Officer)
12
<PAGE>
EXHIBIT INDEX
27. Financial Data Schedule
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated financial statements included herein and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 597,901
<SECURITIES> 4,991,242
<RECEIVABLES> 1,362,760
<ALLOWANCES> 67,160
<INVENTORY> 1,092,213
<CURRENT-ASSETS> 8,483,801
<PP&E> 5,315,102
<DEPRECIATION> 4,444,827
<TOTAL-ASSETS> 10,014,201
<CURRENT-LIABILITIES> 1,931,110
<BONDS> 0
0
0
<COMMON> 111,149,962
<OTHER-SE> (103,066,871)
<TOTAL-LIABILITY-AND-EQUITY> 10,014,201
<SALES> 6,476,291
<TOTAL-REVENUES> 6,488,943
<CGS> 2,514,548
<TOTAL-COSTS> 8,683,135
<OTHER-EXPENSES> (244,871)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,949,321)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,949,321)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
